Aircraft: SMALL AIRCRAFT; LOW WING; 2 ENG; RETRACTABLE GEAR
Phase of flight: Cruise
Anomaly: Aircraft Equipment Problem Less Severe; Deviation / Discrepancy - Procedural Published Material / Policy

On an ICAO VFR flight plan from Alaska to Washington. With Canada overflight; initially filed altitude was 11;500. We had notified controllers that we were descending to 7;500 feet. We had been at 7;500 feet for some period of time (probably 20-30 minutes) and had been handed off to Terminal and were receiving vectors. Visibility and ceiling was VFR but somewhat limited due to smoke/haze from many forest fires. Near Victory Terminal ATC contacted us to confirm that we were at '10;500 feet'. I reported 'Negative; we are at 7;500 feet'. At that point I checked the altitude being squawked on the transponder and noted that it displayed 10;200 feet. I notified the controller that I was switching to my #2 transponder/encoder due to an apparent encoder error and confirmed that I was at 7;500 feet and had been at that altitude since our prior descent. I heard Terminal issue vectors to a jet for traffic avoidance. There was no further communication from Terminal relative to the matter as we continued to receive vectors. We did not see the jet; nor did they report seeing us. I have no idea how close; either vertically or laterally we were from the jet; but assumed it was not a big deal as the ATC controller didn't seem to express any urgency to the vector given to the jet. We completed our flight without incident. Upon returning to base; we sought evaluation of the encoders and found them to operate normally; but found that an intermittent 'altitude loop' in the installed Garmin systems data bus allowed the transponder reported altitude to episodically lock up and report an erroneous altitude. Consultation with at least two different Garmin technical support personnel lead to an eventual reconfiguration of the encoders altitude data bus lines to the installed suite of Garmin avionics to prevent the loop and has solved the problem.I believe that when we were handed off between Canadian controllers that an altitude was verified to the controller as being at 7;500 feet; although from memory I cannot absolutely verify that. I know that we only made one descent and that we notified Comox of that descent in advance.All transponder/encoder/and pitot static certifications for the aircraft were current. The current suite of avionics had been in the aircraft for about one year.Going forward; I will be more diligent in scanning the displayed encoded altitude shown on the transponder displays. In the previously installed avionics suite there was no easy way to know the altitude being squawked without burrowing down thru several menus on the GPS etc; so it wasn't my routine to confirm the altitude; nor had it ever been found to be reported in error.I believe the ATC controller should have noticed the erroneous altitude and queried me sooner as it was a wrong VFR altitude for direction of flight and also was not what I had reported.Bottom line; greater diligence is needed to monitor reported encoded altitude by the pilot will be required as new avionics come on line. A pilot flying through Canadian airspace VFR; was asked by a Controller to verify his altitude at 10;500 feet; but in fact he had reported descending to 7;500 feet. Post flight maintenance found an intermittent Garmin systems data bus 'altitude loop' allowed the transponder to intermittently lock up and report an erroneous altitude.